Equilibrium and Evolution

This book re-examines the theoretical debates and controversies that characterised the 1920s, which Paul Samuelson has highlighted as being decisive to the development of economic analysis in the decades that followed. In these debates, attention was focused on what is now often referred to as Alfred Marshall’s ‘reconciliation problem’, characterised as the attempt to construct supply schedules under conditions of pure competition in the presence of increasing returns to scale. A solution to this dilemma was thought necessary in order to legitimise the partial equilibrium analysis of markets founded on demand and supply functions. It was generally concluded that Marshall’s attempts to resolve the ‘reconciliation problem’ had not only been unsuccessful but had also, as Mark Blaug (1962: 399) summarised, ‘raised false problems that took the best efforts of a generation of economists to solve’.

The first edition of Alfred Marshall’s Principles appeared in 1890, twenty-five years after he had successfully completed studies towards the Mathematical Tripos at St John’s College, Cambridge, and five years after he was elected to the Chair of Political Economy at Cambridge. Insights into this period of Marshall’s professional life are readily acquired from Maynard Keynes’ (1924) detailed memoir of Marshall,¹ together with the selected writings and correspondence assembled in Pigou (1925) and the posthumously published recollections of his wife, Mary Paley Marshall (1947). These sources have been extended considerably through the substantial archival research and enquiry undertaken by Whitaker (1975a: 3–116) and Groenewegen (1995, 2007), along with subsequent compilations of Marshall’s unpublished writings, official papers and correspondence referred to in the previous chapter. Discussion in this chapter draws on this material in order to consider some of the more significant and enduring influences on Marshall’s thinking during the period leading up to the publication of the Principles. Marshall’s views on the nature and role of economic theory were to a significant extent the product of his journey from mathematics to economics, and the rather complex methodological foundations of his Principles cannot be fully appreciated without some reference to the body of knowledge and mode of thinking that evolved during Marshall’s formative years.

In the previous chapter it was shown that Alfred Marshall had assembled, in a publishable form, a partial equilibrium-based theory of value and distribution well over a decade prior to the appearance of his Principles. While the absence of a major publication can be attributed in part to a number of circumstances that diminished the time Marshall had available to writing, the most critical factor that impeded the publication of Marshall’s work was his perception that the ‘isolated apparatus’ being assembled was not capable, in its existing form, of interrogating the facts in a manner that would provide useful insights into the issues that attracted him to the study of political economy. Static equilibrium analysis, taken from the ‘mathematical-physical sciences’, was seen to be isolated from reality because of its inability to incorporate history and therefore the changing inner character and outward institutions of ‘man’. In his inaugural lecture, Marshall (1885b) clearly subscribed to the view that biological speculations, founded on the perception of ‘organic growth’, provided the vehicle through which life could be breathed into his theoretical apparatus.¹ In such a setting, history replaces the unchanging world depicted by static equilibrium, and the potential for change and progress can be contemplated.

In the previous chapter it was established that Marshall intended economic biology, the ‘Mecca of the economist’, to play a significant role in the analytical apparatus being constructed in his Principles. This was to represent a movement away from the ‘mechanical’ mode of thinking allied with the mathematical-physical sciences, an approach that Marshall associated with the work of many of his contemporaries and also with his own early unpublished essays on value. However, as was also noted in the previous chapter, Marshall warned his readers that a relatively large place was to be given to mechanical analogies in a volume on Economic Foundations. Marshall specifically cautioned against the idea that the term equilibrium should be associated with purely statical analysis, maintaining that the Principles was ‘concerned throughout with the forces that cause movement’ (Principles: xiv). This chapter outlines the nature and content of Marshall’s equilibrium analysis, and the attempt to ‘reconcile’ the mechanical analogies with the evolutionary modes of thought discussed in the previous chapter.

George Shackle (1967: 289) characterised the first two decades of the twentieth century as an ‘Age of Tranquillity’ during which the evolving ‘Marshallian’ theoretical apparatus reigned virtually undisputed in the English-speaking world. The end to these tranquil times is most often associated with the Marshallian cost controversies of the 1920s, with Piero Sraffa’s (1925, 1926, 1930) contributions widely seen as epitomising the challenge to the prevailing orthodoxy. The setting in which these debates proceeded is suitably described in the following terms by Sraffa:

In the tranquil view which the modern theory of value presents us there is one dark spot which disturbs the harmony of the whole. This is represented by the supply curve, based upon the laws of increasing and diminishing returns. That its foundations are less solid than those of the other portions of the structure is generally recognised. That they are actually so weak as to be unable to support the weight imposed upon them is a doubt which slumbers beneath the consciousness of many, but which most succeed in silently suppressing. (Sraffa 1926: 536)

This chapter takes its title from Allyn Young’s 1928 Economic Journal article, and in so doing signifies a focus of attention directly back on to the issues that concerned Marshall in the Principles. Specifically, the perspective taken by Frank Knight, Joseph Schumpeter and Allyn Young on the controversies discussed in Chapters 5 and 6 is examined. Though largely antagonistic to Marshall’s approach, these writers from across the Atlantic raised issues that were in general much more closely related to ‘Marshall’s theory’ than did their British contemporaries in the course of the Economic Journal debates.

The first two sections in this chapter restate some of the central conclusions reached in this book. This is followed by a brief discussion that places Marshall’s economics and the associated controversies in the context of mainstream economics as it evolved after Marshall and the Marshallian era.